Wisconsin banks and credit unions' strong balance sheets should help them -- and their customers -- weather economic downturn

Wisconsin banks and credit unions overall had strong balance sheets when the economy went into a free-fall in mid-March — and that should give them more flexibility to work with their customers who have lost jobs and whose businesses are struggling to remain solvent.

With the blessing of federal regulators, financial institutions moved quickly in March to allow businesses and individuals to delay payments and extend lines of credit as restrictions to limit the spread of the virus that causes COVID-19 shut down large parts of the economy.

Financial institutions could do that without worrying about their own survival.

“Banks came into this crisis extraordinarily well capitalized,” said Jay McKenna, president and chief operating officer of North Shore Bank. “Lot of liquidity. Assets quality has been at an all-time high. If there was ever a time for an economic setback, the banking business has never been better prepared.”

That doesn’t mean that banks and credit unions will come through this unscathed. No one knows how many businesses will go under or how many people will be unable to may their payments on home or car loans in the coming year because of the crisis. For now, so-called forbearance programs obscure the potential pain.

More than 6,000 customers who have mortgages with Associated Bank have asked for deferrals of three to six months, according to the bank. It works to about 3% of its mortgage portfolio.

In all, about $1.2 billion in mortgage payments have been deferred.

“We have done a lot to try and ease the burden on consumers and small businesses,” said Philip Flynn, president and CEO of Associated, the largest bank based in Wisconsin. “I would anticipate more relief would be necessary, and we plan on offering it.”

“The big question is how long this is going to last and what the recovery is going to look like,” said McKenna of North Shore Bank.

For now, federal regulators have given banks a lot of flexibility to work with their customers.

“Obviously, that can’t go on forever and ever,” McKenna said. “But for the short term and intermediate term, it has been extraordinarily helpful as we all try to get through this.”

At the end of last year, 0.55% of loans made by banks were noncurrent statewide, said Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association.

“They really did enter this crisis in a very strong position,” she said.

Without question, the percentage of bad loans will increase.

“Businesses definitely are struggling,” Poels said.

She is optimistic that most businesses will recover. But she added that the long-term effects of the crisis may not be known for nine to 15 months.

“It is going to be slower than people are hoping for,” Poels said.

Brett Thompson, president and CEO of the Wisconsin Credit Union League, agreed that the long-term economic effects of the crisis are unknown.

“No one knows what lies ahead,” he said. But he added, “What has transpired so far has been manageable.”

Credit unions overall had built their capital to historic highs and their loan delinquencies were at historic lows when the crisis hit.

“If you are going to have a crisis, this is the ideal point in time to have one,” Thompson said.

Credit unions, too, have been working with their members to defer loan payments.

The federal Paycheck Protection Program — which provides forgivable loans to businesses provided they maintain their payrolls at 75% — also has helped some businesses.

Associated Bank, for instance, secured more than 7,000 of the loans, totaling more than $1 billion, for small businesses.

For its part, North Shore placed tens of millions of dollars for hundreds of its customers, he said, and employees literally worked around the clock.

“It was crazy,” McKenna said.

The program gave banks a chance to build stronger relationships with their customers, Poels said.

Another outcome of the crisis is an increase in online banking.

“People’s comfort level with technology has grown exponentially over the past few months,” Poels said.

Associated Bank, for instance, has seen a dramatic increase in online banking services, Flynn said.

But what will matter the most is what happens to financial institutions’ bottom line in the coming year – and how many customers are unable to make loan payments.

For certain, the toll will be uneven.

Some sectors of the economy have been devastated, McKenna said.

Yet North Shore, a large lender for recreational vehicles and boats, saw a large increase in loan applications for those purchases in the past two weeks.

“It also tells me that there is a large sector of the population that is starting feeling more confident about their own individual circumstances,” McKenna said.

The increase may stem partly from pent-up demand and partly from people who no longer plan to take other vacations this summer.

The mortgage market also has been steady and home values have held up well.

“The purchase market has been really, really strong throughout this,” McKenna said. “It is one of the things that surprised me.”

But workers in low-wage jobs have been the ones hardest hit by the downturn, and they are less likely to be buying homes, much less RVs. Defaults on car loans and credit card debt in the coming months may be the best measure of how they fare in the downturn.

Thompson of the Wisconsin Credit Union League is confident that the state’s credit unions will weather even the bleakest projections on what’s ahead for the economy.

But he said, “That doesn’t mean that there won’t be pain. There will be pain.”